Thursday, January 18, 2018

Fund Managers' Current Asset Allocation - January

Summary: Global equities rose 22% in 2017. Throughout almost that entire period, fund managers held significant amounts of cash and were, at best, only modestly bullish on equities. All of this suggested lingering risk aversion following a recession scare in 2016.

As 2018 begins, cash levels have fallen to the lowest level in 4 years. Allocations to global equities have risen to the highest level in nearly 3 years. In most respects, investors are now bullish.

In the past 6 months, US equities have outperformed Europe by 12% and the rest the world by 2%. Despite this, fund managers remain underweight the US. US equities should outperform their global peers.

Fund managers are underweight global bonds by the greatest extent in 4 years. Only 4% of fund managers believe global rates will be lower next year, a level at which yields have often fallen, at least temporarily.

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Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight equities and underweight bonds. Cash is neutral. Enlarge any image by clicking on it.
Within equities, the US is significantly underweight while Europe, Japan and emerging markets are all significantly overweight. 
A pure contrarian would overweight US equities relative to Europe, Japan and emerging markets, and overweight global bonds relative to a 60-30-10 basket. 

Saturday, January 13, 2018

Weekly Market Summary

Summary:  All of the US indices made new all-time highs this week. Equities outside the US are performing even better. The dominant trend remains higher, underpinned by strong economic data, earnings that are being revised higher and equity breadth that is expanding.

After just two weeks, the SPX is already within 2% of Wall Street's year-end target. By at least one measure, momentum is at a more than 20 year high: in prior instances, short-term risk/reward has been poor but longer term returns positive. Sentiment, which is exceedingly bullish, has also most often led to positive returns 3-6 months later. Net, the longer-term outlook for equities remains favorable.

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All of the US indices made new all time highs (ATHs) this week.  This includes the very broad NYSE as well as the small cap index, RUT. For Dow Theorists, both the industrial sector and the transport sector made new ATHs this week. The dominant trend remains higher.

US markets are off to a fast start in 2018. SPX and DJIA are up 4% and NDX is up 5.5% (from Alphatrends). Enlarge any chart by clicking on it.

Friday, January 5, 2018

January Macro Update: Home Sales, Retail Sales and Manufacturing Surge Higher

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will last into late 2018 at a minimum. Enlarge any image by clicking on it.

Friday, December 15, 2017

What To Expect From Equities In 2018

Summary:  US stocks will likely rise in 2018. By how much is anybody's guess: the standard deviation of annual returns is too wide to get even close to a correct estimate on a consistent basis. Earnings growth implies 6% price appreciation, but tax cuts could boost that to 13%.  Investor psychology could push returns much higher (or lower).

While it's true that investors are already bullish and valuations are already high, neither of these implies a likelihood of negative returns in 2018. That the stock market rose strongly this year also has no adverse impact on next year's probable return.

A bear market is always possible, but is also unlikely. That said, the S&P typically experiences a drawdown every year of about 10%; even a 14% fall would be within the normal, annual range.  It will feel like the end of the bull market when it happens.

The Fed will likely continue to raise rates next year, which normally leads to higher stock prices. While political risks seem high, the stock market usually ignores these. The "Year 2" presidential cycle provides no investment edge.

This article highlights 11 key ideas to explain what to expect in 2018.

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Heading into the end of the year, investment pundits are beginning to share their expectations for how stocks will fare next year. All ten strategists polled by Barron's expect the S&P to rise in 2018, by a mean/median of 6-7% (full article is here; the next three charts from Barron's). Enlarge any image by clicking on it.

Saturday, December 9, 2017

Weekly Market Summary

Summary:  SPX, NYSE and DJIA made new all-time highs this week. This augurs well for the months ahead.

The leader, NDX, has fallen into a trading zone; a return to this week's low likely triggers a small correction to price levels from late October.  SPX would follow.

The big event this week is the FOMC meeting on Wednesday, during which a decision to raise the Fed Fund Rate is expected. This would be just the 4th rate increase this economic cycle. Each of the previous events was followed by a pullback in SPX and also a multi-week period where the index did not hold any gains.

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SPX, NYSE and DJIA made new all time highs (ATHs) this week.  All made an inter-day ATH on Monday and closed at an ATH on Friday. For Dow Theorists, both the industrial sector and the transport sector also made new ATHs this week. The dominant trend remains higher.

SPX remains above all its moving averages, all of which are rising. This is the definition of an uptrend. It would take a break of 2620 (blue line) to trigger a head and shoulders pattern whose measured move targets the trading zone created over 6 weeks in October-November (yellow shading). Enlarge any chart by clicking on it.